Auto stocks could be big winners in 2021.
Auto stocks have been some of the top-performing stocks in the market in 2020 despite a bumpy road this year for the industry. The highest-flying auto stocks have been upstart electric vehicle leaders. However, some legacy automakers have also performed well due to sizable investments in electric and autonomous vehicle technology. At the same time, auto stocks that have fallen behind in transitioning to the next era of the industry have lagged in the market, making stock selection critical for auto investors. Here are seven of Bank of America’s top auto stock picks heading into 2021.
Toyota Motor Corp. (ticker: TM)
Tesla (TSLA) is the most valuable auto company in the world, with a market capitalization of more than $600 billion. However, Toyota is the world’s biggest auto company by revenue. Toyota generated $280.6 billion in revenue in 2019 compared with $24.6 billion for Tesla. Toyota shares are about flat in 2020. Merrill Lynch Japan Securities Co. analyst Kei Nihonyanagi says the company’s business has been solid, and there is a growing sense of urgency within Toyota to focus more on its battery EV technology. Bank of America has a “buy” rating and $180.04 price target for TM stock.
General Motors Co. (GM)
Shares of legacy U.S. automaker General Motors have outperformed the S&P 500 in 2020, gaining about 17%. Wall Street analyst John Murphy says investors don’t fully appreciate General Motors’ profitability, including $4 billion in net income in the third quarter. That profitability stands out even more compared with other EV technology leaders who are struggling to consistently generate positive net income. In November, GM announced plans to invest up to $27 billion in electric and autonomous vehicles by 2025, including the launch of 30 new EV models. Bank of America has a “buy” rating and $72 price target for GM stock.
Chinese EV leader Nio has been one of the top performers in the entire stock market in recent months. Incredibly, Nio’s stock is up nearly 2,000% in the past year, and Murphy says there’s even more upside ahead for the high-growth stock. Nio recently reported a nearly 110% year-over-year increase in vehicle deliveries in the month of November. Securities analyst Ming Hsun Lee says Nio’s fundamentals are on a positive track and is projecting Nio’s revenue will more than double to more than $32 billion in 2021. Bank of America has a “buy” rating and $54.70 price target for NIO stock.
Luxury carmaker Ferrari was spun off from former parent company Fiat Chrysler Automobiles (FCAU) in 2016. Ferrari has been leaving the S&P 500 in its dust in 2020, gaining about 29% year to date. Murphy says Ferrari’s product mix, pricing power and strategic execution outshine many of its auto peers. Ferrari’s average selling price for its vehicles was around $324,000 in 2019, and that type of pricing power boosts the company’s margins and helped generate $200 million in net profit in the third quarter. Bank of America has a “buy” rating and $270 price target for RACE stock.
Honda Motor Co. (HMC)
Nihonyanagi says Honda is well-positioned to outperform in a difficult environment given its robust balance sheet and attractive valuation. Honda’s shares trade at just 10 times forward earnings and 0.42 times sales, and Nihonyanagi says they offer “considerable investment value.” He says the company has a dominant competitive position in the motorcycle business, which is a long-term growth opportunity. In its most recent earnings call, Honda said its priorities are overhauling costs, increasing its EV sales mix and raising its 2.45% dividend. Bank of America has a “buy” rating and $36.96 price target for HMC stock.
XPeng is a leading Chinese EV maker that was listed on the New York Stock Exchange starting in August. Lee says XPeng has impressive operating efficiency and is developing its own in-house autonomous driving technology. XPeng plans to launch XPILOT 3.0 in early 2021, which will feature Navigation Guided Pilot on highways and memory auto parking. Lee says the company’s focus on connectivity is a sound strategy and is anticipating a high attach rate for XPILOT 3.0 upon launch. Bank of America has a “buy” rating and $43 price target for XPEV stock.
Ford Motor Co. (F)
Ford Motor is the largest legacy U.S. automaker, generating about $156 billion in revenue in 2019. Ford reported about $2.4 billion in net income in the third quarter, and Murphy says the strong numbers may be a sign of better days ahead in 2021 after the company struggled to generate consistent results in recent years. Murphy says Ford may be in the early stages of an upswing in earnings growth thanks to its “global redesign” initiative and its upcoming lineup of model launches. Bank of America has a “buy” rating and $10.50 price target for F stock.
Steer toward these auto stocks in 2021:
— Toyota Motor Corp. (TM)
— General Motors Co. (GM)
— Nio (NIO)
— Ferrari (RACE)
— Honda Motors Co. (HMC)
— XPeng (XPEV)
— Ford Motor Co. (F)
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